SFB 303 Discussion Paper No. B-306

Author: Frey, Rüdiger, and Daniel Sommer
Title: A Systematic Approach to Pricing and Hedging of International Derivatives with Interest-Rate Risk
Abstract: We deal with the valuration and hedging of non path-dependent European options on one or several underlyings in a model of an international economy which allows for both interest rate and exchange rate risk. Using martingale theory we provide a unified and easily applicable approach to pricing and hedging Black-Scholes type options on stocks, bonds, forwards. futures and exchange rates. We also cover the pricing and hedging of options to exchange two Black-Scholes type options for one another. The contigent claims may pay off in arbitrary currencies.
Keywords: arbitrage, interest rate risk, exchange rate risk, option pricing, hedging
JEL-Classification-Number: G12, G13, G15
Creation-Date: June 1996 (revised version)
URL: ../1996/b/bonnsfb306.pdf

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